Over the past six months, Teradyne’s shares (currently trading at $126.52) have posted a disappointing 15.4% loss, well below the S&P 500’s 7.3% gain. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Teradyne, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.Despite the more favorable entry price, we're swiping left on Teradyne for now. Here are three reasons why TER doesn't excite us and a stock we'd rather own.
Why Is Teradyne Not Exciting?
Sporting most major chip manufacturers as its customers, Teradyne (NASDAQ:TER) is a US-based supplier of automated test equipment for semiconductors as well as other technologies and devices.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Regrettably, Teradyne’s sales grew at a tepid 4.9% compounded annual growth rate over the last five years. This was below our standard for the semiconductor sector. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
2. Operating Margin Falling
Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Analyzing the trend in its profitability, Teradyne’s operating margin decreased by 8.1 percentage points over the last five years. Even though its historical margin is high, shareholders will want to see Teradyne become more profitable in the future. Its operating margin for the trailing 12 months was 20.6%.
3. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Teradyne’s margin dropped by 4.7 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal it is in the middle of an investment cycle. Teradyne’s free cash flow margin for the trailing 12 months was 16.6%.
Final Judgment
Teradyne isn’t a terrible business, but it doesn’t pass our bar. Following the recent decline, the stock trades at 29.1× forward price-to-earnings (or $126.52 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're pretty confident there are superior stocks to buy right now. We’d suggest looking at FTAI Aviation, an aerospace company benefiting from Boeing and Airbus’s struggles.
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